Financial literacy vs financial advice, which is the best option?
Let’s play a little game. Go to Google with the keywords: “Should I buy, hold or sell Apple stock?”
It is very likely that you will find many expert opinions that directly contradict each other. The term “expert” in finance must therefore be taken with a grain of salt.
In many scientific fields, knowledge and expertise are obtained by studying historical data. In medicine, a doctor can predict what is wrong with you by observing certain symptoms and triaging them based on historical data. Indeed, as Morgan Housel said, “kidneys work the same way in 2020 as they did in 1020.
But investing is not a hard science. It’s a massive group of people making imperfect decisions with limited information…
The kidneys have no emotions, no more than any organ in the body. Humans, on the other hand, do; and they make decisions based on these emotions, which makes these decisions very biased and predicting them is a tedious task.
The problem of expert opinions.
History is not a prophet
“An economist is an expert who will know tomorrow why the things he predicted yesterday did not happen today.” – Laurence J. Peter.
Financial experts are better at explaining than predicting.
The work of financial experts can be likened to that of detectives. A detective might try to predict a criminal’s actions based on historical data he’s likely gathered from other criminals, but human actions are too volatile and random to be locked into predictable outcomes. A detective’s strength lies more in predicting events at a crime scene after they have happened and less in predicting them before they happen. The same goes for a financial expert trying to predict the market.
Many aberrant events in financial history – the Great Depression of 1987, the stock market crash of 2008, etc. – were only explained by economists and financial market experts after they occurred. Virtually none had predicted them.
If expertise is based on understanding historical data, then again: financial advice should be taken with a pinch of salt because in the financial market, history could be a very poor predictor of future events. In the words of Scot Sagan “Things that have never happened before are happening every day.”
Financial advisers could be exposed to certain Prejudices
Bias 1: If you asked the average investor for advice on what stocks to buy, the majority of the stocks they would list are stocks they have already purchased.
Bias 2: Conflict of interest. You have to remember that the average financial advisor prioritizes their profitability over yours.
Bias 3: Cognitive dissonance: Most experts have spent a lot of time, energy and resources learning what they know now. This can be dangerous as it can be hard for them to let go of outdated strategies and ideas. This is called cognitive dissonance in behavioral finance.
Success in finance is about observing and becoming familiar with recent trends and not perpetually clinging to older ones.
These biases and many others not considered in this article can expose expert advice to flaws.
Seeking financial advice is of course not taboo, but an investor’s decisions should not only be motivated by financial advice – especially that sought randomly on the web – but also balanced with financial knowledge. personal.
It’s easy to think that financial literacy is only for those who can’t afford a financial advisor. To approach this paradigm, let’s examine this title from 2014.
“Popstar Rihanna is suing her accountant and financial adviser Peter Gounis, for ‘allowing’ him to squander $9 million, which nearly led to her bankruptcy.”
Even with a financial advisor, very bad financial mistakes could still be made. Everyone should be financially savvy, rich and poor alike.
Importance of financial literacy while taking financial advice
- Emotional stability.
A good financial decision is not necessarily the one with the potential to make the most profit, but the one with the potential to allow you to sleep better at night. Knowledge reduces anxiety in many areas of life, but especially in finance. If one is throwing something, knowing gravity takes the worry out of whether the object would fall or not.
A finance specialist understands the turmoil in the financial market and would rarely be inclined to panic, which always results in making a rash decision.
- Keeps your advisor under control
If you’re financially savvy, you’re more likely to protect yourself from the biases of an adviser who has to think things through and then organize the advice into a pitch, stating the reasons rather than giving them to you as infallible. stone tablet commandments.
The essence of this article is not to point out why financial literacy or financial advice is a better option than the other, but to see how the two should complement each other. Financial advice is not infallible and should be checked.
If you’re new to investing, prioritize your learning process. Understand the drivers of the financial market, what every breaking news story means to you, whether it’s a Central Bank rate hike, stock splits and reverse stock splits, inflation, etc
You should have a preconceived idea of the decision that seems right to you before seeking advice.
If you ever find yourself looking for a stock to buy, research the reasons why it’s a good buy and then the reasons why it’s not. Study the news and the drivers of the stock and decide when or how to invest.
Written by Jonathan Chinemerem